Chapter 27 Glossary — Fair Housing & Disclosures +18California · Real Estate · English

Blockbusting is inducing panic selling below market value by exploiting prejudices about changing neighborhood racial makeup. Redlining is the illegal (in California) lending policy of denying loans in older/minority areas without considering the individual applicant's creditworthiness. Both are prohibited discriminatory practices.

• ✓Blockbusting induces panic selling by exploiting neighborhood racial prejudices and is illegal
• ✓Redlining denies loans by area rather than individual creditworthiness and is illegal in California

The Open Housing Law (Congress, April 1968) prohibits discrimination in real estate sales based on race, color, or religion. The Housing Financial Discrimination Act of 1977 (Holden Act) eliminates discrimination in lending based on neighborhood character.

• ✓The 1968 Open Housing Law prohibits discrimination in real estate sales by race, color, or religion
• ✓The Holden Act (1977) prohibits lending discrimination based on neighborhood character

Actual fraud is an intentional act to deceive (false statement, promise without intent to perform, suppressing truth). Constructive fraud is a breach of duty by a fiduciary gaining advantage without actual fraudulent intent. Misrepresentation is a false or misleading statement. Caveat emptor means let the buyer beware, absent misrepresentation.

• ✓Actual fraud requires intent to deceive; constructive fraud does not require fraudulent intent
• ✓A promise made without intent to perform constitutes actual fraud

A Notice of Nonresponsibility relieves an owner from liability for unauthorized work; it must be verified, recorded and posted. Lis pendens gives constructive notice of pending litigation affecting title. Constructive notice imputes knowledge through official records.

• ✓A Notice of Nonresponsibility must be verified, recorded, and posted to be effective
• ✓A lis pendens gives constructive notice of pending litigation affecting the property

A broker is a person employed for a fee to carry out activities in the license law definition of a broker. The broker-salesperson relationship agreement is required by the Real Estate Commissioner's regulations, setting forth the material aspects of the relationship between a broker and each salesperson/broker performing licensed activities under the supervising broker.

• ✓A broker is employed for a fee to perform activities defined in the license law
• ✓A written broker-salesperson relationship agreement is required by Commissioner regulations
• ✓Salespersons perform licensed activities in the name of the supervising broker

Advance fees are paid before services are rendered; unlawfully charging advance fees for advertising property with no intent to obtain a buyer is an illegal practice. A desist and refrain order directs a person to stop committing an act in violation of the Real Estate Law.

• ✓Charging advance fees for advertising with no intent to obtain a buyer is illegal
• ✓A desist and refrain order directs a person to stop violating the Real Estate Law

A business opportunity is the assets of an existing business including goodwill; under Real Estate Law it includes the sale or lease of the business and goodwill. A code of ethics is a set of rules expressing accepted professional conduct governing member relationships.

• ✓Business opportunity includes the sale or lease of business assets and goodwill
• ✓A code of ethics governs accepted professional conduct among members

Tenancy in common is co-ownership with undivided interests, no survivorship, and unequal interests allowed. Right of survivorship distinguishes joint tenancy. Tenants by the entireties applies to spouses with survivorship.

• ✓Tenancy in common: undivided interests, no survivorship, interests need not be equal
• ✓Right of survivorship is the distinguishing feature of joint tenancy
• ✓Tenants by the entireties: spouses, jointly/equally owned with survivorship

Title indicates the fee position of lawful ownership (bundle of rights). Title insurance protects an owner or lender against certain losses (e.g., defective or unmarketable title). A title report discloses title condition.

• ✓Title is the bundle of rights proving ownership
• ✓Title insurance protects against defective or unmarketable title
• ✓Title report discloses title condition before issuing a policy

Ownership is the right to possess and use property to the exclusion of others. Property divides into real property (land and attachments) and personal property (all property that is not real property).

• ✓Ownership is a collection of rights to use and enjoy property
• ✓Real property is land and anything growing, attached, or erected on it
• ✓Personal property is any property that is not real property

Separate property is owned by a married person outside community interest (acquired before marriage, by gift/inheritance, or from separate property proceeds). Severalty ownership is sole ownership by one person.

• ✓Separate property includes property acquired before marriage or by gift/inheritance
• ✓Separate property includes rents/profits from and proceeds of separate property
• ✓Severalty ownership means sole ownership by one person

A reversion is the right to future possession by the person creating the preceding estate. A remainder is an estate taking effect after termination of a prior estate (e.g., a life estate) — a future possessory interest.

• ✓Reversion returns to the grantor after the preceding estate ends
• ✓Remainder takes effect after a prior estate terminates
• ✓Reversionary interest is a future interest upon termination of the preceding estate

A right of way is a privilege operating as an easement, allowing another to pass over or construct on land. Prescription acquires easement interests by long continued use over the statute of limitations period.

• ✓Right of way is an easement to pass over or construct on land
• ✓Prescription acquires easements by immemorial or long continued use
• ✓Prescription time is ordinarily the statute of limitations term

Riparian rights are the rights of a landowner whose land borders a stream or watercourse to use the water adjacent to or flowing over the land, provided use does not injure other riparian owners.

• ✓Apply to land bordering a stream or watercourse
• ✓Use must not injure other riparian owners

Restrictions limit the use of real property and are public (zoning ordinances) or private (deed covenants). Police power is the state's right to enact and enforce laws for order, safety, health, morals, and general welfare.

• ✓Restrictions are public (zoning) or private (deed covenants)
• ✓Police power protects public order, safety, health, morals, and welfare
• ✓Nonconforming use is a use predating current zoning that is allowed to continue

NAR and its constituent boards form a composite organization whose objectives include real estate education, research, exchange of information, raising practice standards, preserving property ownership rights, and formulating a code of ethics. The NAR Code of Ethics was formulated and adopted; in brief it entails adhering to the Golden Rule.

• ✓The NAR Code of Ethics is founded on the Golden Rule
• ✓Objectives include raising practice standards and preserving property ownership rights
• ✓The latest copy is available at www.realtor.org

A metes and bounds description is used when property is not on a recorded map and is shaped impractically for section/township description. It starts at a fixed point of beginning and follows boundaries in courses and distances back to that point. A mistake at the point of beginning renders the description worthless.

• ✓Metes are measures of length (feet, yards); bounds are boundaries, natural and manmade
• ✓A metes and bounds description must start and return to a fixed point of beginning
• ✓A mistake at the point of beginning makes the description worthless
• ✓Monuments (trees, boulders, creeks, fences, roads, iron pipes) mark boundaries but are subject to destruction

The seller is the fee title holder/owner until the close of escrow. If possession is delivered at a time other than close, the principals may agree to adjust the proration date. Depending on the agreement, possession may alter incidents of ownership. If possession is delivered after close, principals may agree to prorate taxes, rent, assessments, and prepaid items (such as interest on a new loan or prepaid fire insurance premiums) as of the possession date or upon recording of the grant deed.

• ✓The seller remains fee title owner until the close of escrow
• ✓Prorations may be adjusted if possession is delivered at a time other than close
• ✓Prepaid items include interest on a new loan and prepaid fire insurance premiums

A broker acting as escrow holder is often named as a defendant in suits to recover money held as trustee. Under the Code of Civil Procedure, where the only relief sought against one of several defendants is payment of a stated amount of money, a mere stakeholder with no interest, facing conflicting demands, may apply for an order discharging it from liability and dismissing it from the action — an interpleader action — but must deposit the disputed amount with the clerk of the court. The broker need not wait to be sued: a holder of a disputed fund may file an interpleader, deposit the fund with the clerk, allege no interest, and require the claimants to litigate. The holder may be awarded attorney fees and costs. Interpleader is used when buyer and seller dispute a deposit in a failed transaction.

• ✓A broker-stakeholder may use an interpleader action to be discharged and dismissed from a suit over disputed funds
• ✓The broker must deposit the disputed amount with the clerk of the court
• ✓A holder may file interpleader without waiting to be sued and may be awarded attorney fees and costs
• ✓Interpleader is appropriate when buyer and seller dispute a deposit in a failed transaction

Under the Education Code, a school district's governing body may pay a commission to a licensed real estate broker who procures a buyer for property sold by the board. The sealed bid must be accompanied by the name of the broker to whom the commission is to be paid and a statement of the rate or amount. If a sale is made on a higher oral bid to a buyer procured by another qualified licensed broker, the board allows a commission on the full amount for which the sale is confirmed. In that case, one-half of the commission on the highest written proposal goes to the broker who submitted it, and the balance goes to the broker who procured the confirmed purchaser.

• ✓A school district may pay a commission to a licensed broker who procures a buyer; the sealed bid must name the broker and state the commission
• ✓On a higher oral overbid procured by a different qualified broker, the board allows commission on the full confirmed amount
• ✓One-half of the commission on the highest written proposal goes to the submitting broker; the balance goes to the broker procuring the confirmed purchaser

When bids received for State of California real property, after advertising, do not equal its appraised value, the Department of Finance may authorize employment of a licensed real estate broker to effect the sale on a commission basis. This procedure does not apply to surplus real property of the State Division of Highways.

• ✓The Department of Finance may authorize a licensed broker to sell state real property on commission when bids fall short of appraised value
• ✓This procedure does not apply to surplus property of the State Division of Highways

Civil Code 2923.5 requires initial borrower contact at least 30 days before recording a Notice of Default for owner-occupied 1-4 unit loans recorded between January 1, 2003 and January 1, 2008. Contact must assess the borrower's finances and explore foreclosure alternatives, and advise of HUD-certified counseling agencies.

• ✓Contact borrower at least 30 days before recording Notice of Default
• ✓Applies to owner-occupied 1-4 unit loans recorded Jan 1, 2003-Jan 1, 2008
• ✓Borrower may request meeting within 14 days
• ✓Notice of Default must include a due diligence declaration

Civil Code 2923.52 requires the three-month delay between Notice of Default and Notice of Sale to be extended 90 additional days to allow loan modification, for first-lien residential loans recorded 2003-2008 where the borrower occupied as principal residence. Exemptions include public agency loans and servicers with an exemption order.

• ✓90-day extension between Notice of Default and Notice of Sale
• ✓Applies to first-lien owner-occupied residential loans recorded 2003-2008
• ✓Servicer with comprehensive loan modification program may obtain exemption order
• ✓Loan modification targets 38% housing debt-to-income ratio

California's Higher-Cost/Priced Mortgage Loans law (Financial Code Section 4995 et seq., effective July 1, 2010) mirrors the federal Section 35 definition: APR exceeding average prime offer rate by 1.5% (first/senior) or 3.5% (second/junior). Prepayment penalty fees shall not exceed 2% of the principal prepaid during the first 12 months, or 1% during the second 12 months.

• ✓Prepayment penalty cannot exceed 2% of principal prepaid in the first 12 months
• ✓Prepayment penalty cannot exceed 1% of principal prepaid in the second 12 months
• ✓First/senior trigger is 1.5% and second/junior is 3.5% over average prime offer rate
• ✓Negative amortization is prohibited in these loans

Licensed persons owe a duty of fair dealing and may not divide loans to evade the law or make false/misleading statements. MLBs limiting their model to Higher-Priced Loans must disclose it orally and in writing. Broker compensation cannot be increased for arranging a loan with a prepayment penalty, and compensation must be the same whether paid by lender, borrower, or third party.

• ✓Licensed persons may not divide the loan transaction to evade the law (subterfuge prohibited)
• ✓Broker compensation must be the same whether paid by lender, borrower, or third party
• ✓MLBs cannot receive extra compensation for arranging loans with prepayment penalties
• ✓Licensed persons may not recommend borrowers default on existing debts

A creditor/lender who willfully and knowingly violates TILA or Regulation Z is subject to a fine of not more than $5,000 or imprisonment for not more than one year, or both. Violations may include giving false/inaccurate information, failing to provide disclosures, or using an FRB chart/table to consistently understate the APR.

• ✓Willful and knowing violation: fine up to $5,000 and/or imprisonment up to one year
• ✓Violations include false information, failing to disclose, or consistently understating APR
• ✓Governed by Section 112 of TILA (15 USC 1611)

Good architecture concerns room layout and functional utility as well as exterior style. Marketability is the ultimate test of functional utility. A house with a style extremely foreign to its surroundings encounters difficulty in sale.

• ✓Marketability is the ultimate test of functional utility
• ✓Functional utility measures convenience and economy in use of the property
• ✓Style foreign to surroundings meets market resistance

Building quality classifications range from Low (minimum code) and Fair, to Average (meets VA/FHA standards, tract homes), Good, Very Good (custom architect-designed), and Excellent (highest quality, custom features). Quality of construction is a critical inspection factor.

• ✓Quality classes: Low, Fair, Average, Good, Very Good, Excellent
• ✓Average quality meets VA and FHA standards; found in large tracts
• ✓Very Good and Excellent are custom architect-designed with many features

The Mello-Roos Community Facilities Act of 1982 provides for a wide variety of facilities/services without requiring specific benefit to individual properties. It resembles a general property tax levy and must be disclosed by sellers of 1-4 dwelling units.

• ✓Mello-Roos assessment is secured by a lien but principal amounts are not tied to specific parcels
• ✓Unpaid assessments do NOT appear on the property tax bill; separately levied and collected
• ✓Civil Code Section 1102.6b requires seller of 1-4 dwelling units to disclose a Mello-Roos assessment

Various California assessment acts govern financing of street and public improvements, including the Vrooman Street Act (1885), the Street Improvement Act of 1911, and the Improvement Bond Act of 1915.

• ✓Vrooman Street Act (1885): city councils may grade/finish streets, construct sewers, issue bonds
• ✓Street Improvement Act of 1911: most-used for street improvements; assessment appears as lien on tax bill; may be prepaid anytime
• ✓Improvement Bond Act of 1915: bonds finance subdivision street improvements (usually max 6% interest)

A blanket encumbrance makes more than one lot/unit security for one lien. Without unconditional release agreements, the subdivider must protect purchaser money by one of three methods.

• ✓A blanket encumbrance exists when more than one lot/unit/interest is made security for one trust deed note or lien
• ✓Method 1: Impound purchase money in an acceptable escrow depository until proper release
• ✓Method 2: Place title in trust until proper release (no longer considered practical)
• ✓Method 3: Furnish a bond to the State of California providing for return of money if release is not obtained
• ✓Governed by Code Sections 11013, 11013.1, 11013.2, and 11013.4

Even without a blanket encumbrance, purchaser deposit money must be impounded in escrow/trust unless the subdivider elects an acceptable alternative such as a bond.

• ✓Deposit money must be impounded in an escrow or trust account unless an acceptable alternative is elected
• ✓The most common alternative is a bond to the State assuring return if title is not delivered on time
• ✓A bond cannot be used to secure reservation deposits under a preliminary public report or deposits under a conditional public report

A real property sales contract (Civil Code Section 2985) generally does not require title conveyance within one year. Lots sold this way are usually conveyed in trust.

• ✓A real property sales contract does not, with exceptions, require conveyance of title within one year of formation
• ✓Subdividers usually convey the subdivision in trust per Commissioner's Regulation 2791.9
• ✓This is an acceptable alternative under Section 11013.2(d) or 11013.4(f)

Community Redevelopment Law authorizes local governments to establish a redevelopment agency to correct blighted conditions in a project area. Project areas may include non-detrimental lands necessary for effective redevelopment.

• ✓Community Redevelopment Law is found at Health and Safety Code Sections 33000 et seq.
• ✓A redevelopment agency is established by ordinance subject to referendum
• ✓Project areas may include non-blighted lands whose inclusion is necessary for effective redevelopment

Redevelopment purposes include expanding low/moderate income housing, employment opportunities, and community well-being. The agency has separate legal status and broad powers, though housing is the only activity aided outside project areas.

• ✓Housing is the only activity a redevelopment agency may aid outside redevelopment areas
• ✓The agency has legal status separate from the jurisdiction; it can sue/be sued, use eminent domain, dispose of property, and borrow money
• ✓Usually the city/county elected officials function as the agency board of directors

A community redevelopment agency (CRA) must replace low/moderate income housing lost through redevelopment and provide relocation benefits. Affordability enforcement mechanisms changed in 1988.

• ✓Lost low/moderate income housing must be replaced within four years of destruction, removal, rehabilitation, or development
• ✓The agency must provide relocation benefits to displaced households or businesses
• ✓Beginning in 1988, affordability requirements must be enforced through covenants, conditions, and restrictions in recorded deeds

Most redevelopment projects are funded through tax allocation bonds secured by anticipated property tax revenues, called tax increment financing. The CRA receives increases in project area property taxes resulting from redevelopment.

• ✓Tax increment financing allows the CRA to receive increases in project area property taxes from redevelopment
• ✓Tax allocation bonds are obligations only of the CRA and can be issued without voter approval
• ✓The original tax base continues to be allocated to the county and other taxing entities

CRAs must set aside a minimum percentage of tax increments for low and moderate income housing and may exercise broad powers to carry out this mandate. Other funding tools are also available.

• ✓CRAs (unless exempted) must set aside not less than 20% of tax increments for low/moderate income housing
• ✓Set-aside funds may be used to acquire/improve land, construct/rehabilitate buildings, provide subsidies, and maintain mobilehome supply
• ✓Other funding tools include general obligation, lease revenue and mortgage revenue bonds, transient occupancy taxes, and sales tax shares

The term REALTOR can only be used by licensees associated with the National Association of REALTORS. The designation connotes competency, fairness, and high integrity. The National, California, and Local Associations have adopted a code of ethics and professional standards that may establish obligations higher than law. Where the Code of Ethics and the law conflict, the obligations of the law take precedence.

• ✓Only members of the National Association of REALTORS may use the REALTOR designation
• ✓When the Code of Ethics and law conflict, the law takes precedence

Management fees can be a flat monthly amount, a percentage of gross rents collected, or a combination. Most managers base fees on a percentage of gross rents collected, varying from 3% on large structures to as much as 20% on individual houses or small buildings. In some resort areas with high turnover, up to 50% of gross rent may be charged. Additional compensation is common for lease renewals and supervising major repairs.

• ✓Fees may be a flat amount, a percentage of gross rents collected, or a combination
• ✓Percentages range from 3% on large structures to 20% on individual houses/small buildings
• ✓Resort areas with high turnover may charge as much as 50% of gross rent
• ✓Managers frequently receive extra compensation for lease renewals and supervising major repairs
• ✓Salaries and wages must comply with the minimum wage law

The broker should be prepared to inform the purchaser of various federal, state, and local agencies to contact for required permits, licenses, and clearances.

• ✓IRS is contacted for an employer identification number for federal withholding taxes
• ✓State Board of Equalization handles sales tax permit, bond, and deposit
• ✓State Dept. of Benefit Payments handles state payroll tax withholding
• ✓State Dept. of Industrial Relations handles workers' compensation insurance and Cal/OSHA; county and municipal agencies handle business licenses

Mineral, oil and gas subdivisions are those created for the sale, lease or financing of 5 or more speculative parcels of land for mineral, oil or gas purposes. Subdivision laws apply with no exemption for lots of 160 acres or more. The property may be located in California or any other state; if the developer proposes to make sales in California, the Department assumes jurisdiction. No such subdivisions have been filed for years due to stringent legal conditions and widespread prospecting by major oil companies.

• ✓An M.O.G. subdivision is 5 or more speculative parcels for mineral, oil or gas purposes
• ✓There is no exemption for lots of 160 acres or more
• ✓The Department assumes jurisdiction if the developer proposes to make sales in California
• ✓Property may be located in California or any other state

The Federal Housing Administration's role in financing is to insure loans made by approved lenders; the FHA does not lend funds directly or purchase trust deeds.

• ✓The FHA insures loans made by approved lenders
• ✓The FHA does not act as the direct lender of funds

A subordination clause in a trust deed may give priority to liens subsequently recorded against the property, making an existing beneficiary's rights secondary to a later trust deed.

• ✓A subordination clause makes an existing lien secondary to later-recorded liens
• ✓It gives priority to subsequently recorded trust deeds

When a loan is fully amortized by equal monthly payments of principal and interest, the amount applied to principal increases while the interest payment decreases over the life of the loan.

• ✓In a fully amortized loan the principal portion increases each period
• ✓The interest portion decreases each period as the balance declines
• ✓Total payment amount remains constant

Under the Federal Truth-in-Lending Law, two of the most critical facts that must be disclosed to buyers or borrowers are the finance charge and the annual percentage rate (APR).

• ✓Truth-in-Lending requires disclosure of the finance charge
• ✓Truth-in-Lending requires disclosure of the annual percentage rate (APR)

A balloon loan is most nearly a partially amortized loan (with a large final payment). For construction loans disbursed in progress payments, most lenders disburse the last payment when the period to file a mechanic's lien has expired.

• ✓A balloon loan is a partially amortized loan
• ✓The final construction loan payment is typically released after the lien filing period expires